Both sides grope for solutions to shutdown, debt ceiling

WASHINGTON -- The fight over the government shutdown, which entered its third day Thursday, is rapidly turning into a two-pronged fiscal confrontation to also avoid a potential default after Oct. 17 on the nation's $16.7 trillion debt.

House Republicans, led by Speaker John Boehner, are pursuing a broader strategy to reach an agreement that will open the government, remove the prospect of default, and achieve broader budget reforms to bring down the debt.

"It's frankly now merged into a much bigger fight about the debt ceiling and the overall shape of the budget," said a House Republican allied with Boehner, who asked not to be named in order to speak candidly about internal party strategy.

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While the shutdown fight began as a battle over the Affordable Care Act and Republican efforts to defund or delay the health care law, the lawmaker said Republicans would pursue a strategy to achieve fiscal reforms beyond the law. "It doesn't mean Obamacare is not part of it, it clearly is, but I would say what precipitated the fight is probably smaller than the issue we're moving toward now."

The lawmaker said that if Boehner could extract the framework of a budget agreement, he could move to end the shutdown and raise the debt ceiling in one vehicle, sparing the party multiple politically tough votes. "You don't need every (Republican) for a deal," the member said. "Right now it's Boehner signaling he's willing to bargain and negotiate, it's not the president."

President Obama and Senate Democrats say they will only negotiate on a budget deal after Republicans agree to end the shutdown and lift the debt ceiling, but Senate Majority Leader Harry Reid, D-Nev., also acknowledged the two issues were conflating. "Right now, the debt ceiling's facing us very quickly. So we're talking about the (stopgap bill) now, but it's hard to separate the two because they're right on top of us."

Obama emphasized the stakes at an event at a construction company in Rockville, Md., Thursday, saying Washington's inability to deal with the looming debt ceiling would be worse than the government shutdown. Distribution of Social Security and disability benefits would be delayed, and pensions would be decimated and interest rates would skyrocket, Obama said.

"As reckless as a government shutdown is, as many people are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse," Obama said.

The president said Thursday afternoon that he would not try to raise the debt ceiling on his own.

A Treasury Department report released Thursday spelled out the consequences of failing to raise the debt ceiling: "Even the prospect of a default can be disruptive to financial markets and American businesses and families." During the July 2011 fight over the debt ceiling, the report said, consumer confidence fell 22%, the stock market dropped 17% and monthly payments on new mortgages went up an average of $100 - all because of market uncertainty over the increase in the debt limit.

Raising the debt ceiling does not influence future government spending; it is the federal government's commitment that it will pay off its existing debt. Failure to raise the ceiling weakens the U.S. government's commitment to the bonds it sells investors around the world and could lead to a major sell-off of those bonds, stimulating a global financial crisis.

"Ain't gonna happen," said Rep. Mike Simpson, R-Idaho, when asked if the House would allow the United States to default. Simpson said he supported Boehner's efforts to reach a broad budget deal, and that Republicans would like to see a framework for overhauling the federal tax code and reduce mandatory spending on entitlements, like Medicare. "We might have differences about how you do it, but most members agree you have to do those things."

Jared Bernstein, the former top economic adviser to Vice President Biden, said that by taking the debt ceiling debate off the table that Boehner could potentially gain some negotiating leverage in the budget fight, but he does it at the risk of the GOP base "throwing him under the bus."

In past standoffs - including the 2012 fiscal cliff fight - Bernstein acknowledged that Obama administration stumbled when it has proclaimed that it "wouldn't negotiate only to end up negotiating." Obama has been emphatic that this time around that he will not negotiate on the debt ceiling.

"The fact they've stiffened their spine is instrumental to bringing Boehner to this point," Bernstein said.

The stalemate has taken a toll on financial markets. At the end of trading Thursday, the Dow Jones industrial average, the bellwether index on Wall Street, had dropped almost 137 points. Financial executives who met with Obama Wednesday agreed that risking default over the debt ceiling increase, in the words of Goldman Sachs Chairman and CEO Lloyd Blankfein, "should not even be considered a viable option."

Despite the warnings, Obama and congressional Republicans are no closer to ending the shutdown. A meeting between Obama and congressional leaders late Wednesday failed to yield an agreement.

On Thursday, House Republicans continued to pursue a piecemeal shutdown strategy to pass targeted funding bills for popular government services. However, the bills are being stone-walled in the Senate, where Senate Majority Leader Harry Reid, D-Nev., has offered to negotiate with Republicans on a broader budget agreement only after they approve a stopgap spending bill to fully reopen the federal government.

House Majority Leader Eric Cantor, R-Va., wrote to rank-and-file Republicans in a memo Thursday that he was confident Obama and congressional Democrats would eventually bow to negotiations if Republicans hold the line.

"While no one can predict with certainty how the current shutdown will be resolved, I am confident that if we keep advancing common-sense solutions to the problems created by the shutdown that Senate Democrats and President Obama will eventually agree to meaningful discussions that would allow us to ultimately resolve this impasse," Cantor wrote, "The American people have elected a divided government and they expect us to work together and they will not countenance one party simply refusing to negotiate."

House Republicans have scheduled a 10 a.m. meeting Friday to discuss their negotiating positions.